BB 2012-10-03 Openness of trade and openness of minds key to meeting challenges of the future - Lamy

"Openness of trade and openness of minds" key to meeting challenges of the future - Lamy

Director-General Pascal Lamy, in a speech at the Brookings Dialogue in Washington, D.C. on 1 October 2012, said that “the challenges of the future will be no less complex or challenging than those we face today. In fact, there is every reason to believe that the economic, environmental and social conditions we have created today will make those challenges even more difficult to meet”. Excerpts from his speech:

“Charting a Course for Trade in an Uncertain Future”

Advances in technology and transportation have slashed the expense and uncertainty of distance. The rapid growth of global value chains, the rising use of regulatory-based, non-tariff measures and the shift in trade patterns as South-South trade grows rapidly have transformed trade in the last decade and I believe these activities will continue to expand in the years ahead.

Trade as a share of global GDP has risen from roughly 40% in 1980 to around 60% today. In the United States, a country long considered less dependent on trade than many others, the share has risen from 10% to 25% over the same period of time. US exports of goods and services in the last 10 years have more than doubled to over $2 trillion. One reason for this dramatic expansion is that US exporters have entered new markets in a big way. When China entered the WTO in 2001, US exports to the Middle Kingdom were $20 billion. By 2011 they had increased more than five-fold to over $100 billion.

In addition to China, many new trading powers have emerged — Brazil, India, Mexico and Malaysia are all in the top 25 leading exporters table, and all posted export growth of 15% or better in 2011. Today, developing countries’ share of trade is about 50% compared with a global share of around one-third in 2008.

Probably more important, the nature of trade has also changed. High-tech products used to be made in the US, Japan or Germany. Today they are made in the world, with components and parts fabricated in many countries. The country where the final assembly takes place may contribute only a small fraction of the final value of the product.

Today, nearly 60% of the volume of world merchandise trade is trade in components. In Asia the figure is closer to two-thirds. The import content of the average export is 40%, up from 20% two decades ago.

These value chains have not only changed the way companies trade, they are changing the very nature of the trade debate. When products were made in a single country by a single company the argument that exports were good and imports bad was more easily defended. This mercantilist approach was, for centuries, a driving force in trade policy, as was the concept of reciprocity.

But global value chains have turned all of this on its head. Companies wishing to be globally competitive in a fierce marketplace need access to the best possible inputs — goods and services — at the lowest possible prices. Hindering companies from seeking such imports only renders them less competitive globally. It is self-defeating. This fact, together with strict monitoring by the WTO, explains why governments have largely resisted the wide scale application of trade restrictive measures on imports.

Not everyone has fully understood this important shift, but the debate is evolving, starting with the way we measure trade.

If we were to measure trade in value-added rather than gross statistical terms, bilateral trade balances would look very different. True, the iPhone is assembled in China, but the goods and services leading up to the final assembly came from 15 different companies in many different countries. The value added to the iPhone in China is around 4%, far less than the value added in the United States, Japan, Germany and South Korea. Yet when a $400 iPhone is sold in the United States, standard trade accounting lists it as $400 credit to China’s side of the ledger and $400 debit for the United States. WTO economists believe that China’s $295 billion trade surplus with the United States would be reduced by nearly half if two-way trade were measured in value added terms. Given the tremendous importance of this bilateral relationship for both countries, and for the rest of the world, I believe looking a bit more closely at the numbers makes sense.

The broader trend to more use of global supply chains is likely to grow, as will competition to host production. The cost of labour is by no means the only variable companies consider when deciding where to manufacture or source their components. Sound domestic policies, good education, adequate social services, and quality infrastructure are critical elements in determining where foreign direct investment will flow in the future.

This explains why many companies building everything from aircraft and automobiles to furniture and padlocks have increased investment in US-based production facilities. I don’t wish to enter into the “off-shoring/on-shoring” polemic that I know is rather heated in this country. But the point is that companies from around the world continue to invest billions of dollars in bricks and mortar in the United States.

One often overlooked area of policy which has a growing impact on competitiveness as global value chains disseminate production is customs procedures. The longer a producer has to wait for the needed imported component, the less competitive she or he becomes. Trade facilitation also happens to be one area of international rule making where we may be able to reach a WTO deal. Customs procedures, paper work and border delays today comprise roughly 10% of the value of world trade, or around $1.4 trillion. A trade facilitation deal in the WTO to curtail fees and paperwork, create greater transparency and reduce obstacles to goods in transit would cut those costs in half.

In this new world of trade, tariffs are less of a problem when doing business in foreign markets. Tariffs have not disappeared. They remain high on certain products. Recent increases in applied tariffs by certain WTO members have again brought to the forefront the value of slashing tariff ceilings in the WTO.

But in the meantime governments are implementing a variety of non-tariff measures which impact trade flows, sometimes profoundly.

These measures are regulatory in nature and are aimed at protecting consumers’ health and safety, culture or certain lifestyles. They include things like standards, testing and certification procedures.

But removing these types of regulations is often neither desirable nor politically feasible. The challenge for the WTO and other multilateral organizations is therefore not necessarily scaling back these measures but seeking to reduce the discrepancies between them so that they do not conflict and do not unnecessarily restrict trade — a different way of levelling the playing field.

As regional or bilateral preferential trading arrangements multiply, the risk of disharmony between NTMs threatens to grow. These trading arrangements may include elements not covered by the WTO agreements such as social and environmental standards, recognition of standards or qualifications. There is a danger that the regulatory elements of each accord may not only differ but clash, creating perhaps unintended but very real barriers to trade.

Global co-operation is needed to address these measures. And yet the international economic crisis has drained much of the political energy from the multilateral system.

How will the WTO adapt to the rapidly changing circumstances that the future will inevitably bring?

To help provide answers to these questions I have assembled a panel of 12 experts – with the great contribution of Tom Donahue from the US Chamber of Commerce — to report on their findings by the beginning of next year.

Of one thing we can be certain, the role of emerging countries, in trade as elsewhere, will continue to grow. We are in a multipolar world. Harbouring many centres of influence lends greater legitimacy to the work of the WTO, but it also brings greater complexity to global decision-making. A global consensus is needed on the role of trade for growth, for development, for job creation, for poverty alleviation.

There is something else we know: the challenges of the future will be no less complex or challenging than those we face today. In fact, there is every reason to believe that the economic, environmental and social conditions we have created today will make those challenges even more difficult to meet. But what is for sure is that more openness is needed, openness of trade and openness of minds. I look forward to Brookings leading this debate.